Time Warner to spin out its magazine unit

(Reuters) - Time Warner Inc will soon be without the magazine unit that provided the foundation for the company and the first part of its name.

Time Inc, the division that publishes titles like Time, Fortune and People, will be spun off into a separate company, Time Warner said late Wednesday, ending weeks of merger negotiations with Meredith Corp.

The process to separate Time Inc into an independent public company will likely take place by the end of the year.

Time Warner CEO Jeff Bewkes wrote in an internal memo obtained by Reuters that, "although change can be unsettling," Time Inc's "great legacy will live on as embarks on this new journey as a publicly-traded company."

In a separate statement, Meredith said it had been approached by Time Warner. The two companies had been in talks to combine Time Inc's lifestyle and entertainment titles including People and InStyle with Meredith's titles such as Everyday Living with Rachael Ray and Better Homes and Gardens into a new publicly traded company.

"We respect Time Warner's decision and certainly remain open to continuing a dialogue on how our companies might work together on future opportunities," Meredith Corp CEO Stephen Lacy said in a statement.

Morningstar analyst Michael Corty did not rule out a future deal between the two companies. "Clearly, Time Warner did not get the right price from Meredith. I don't think this 100 percent eliminates some kind of combination with Meredith in the future," he said.

Magazines have been hit with unprecedented challenges in recent years as people turn to smart phones and tablets to read and advertisers look to other media to place dollars beside print. Investors have been pushing Bewkes for years to hive off Time Inc, which is considered a slow growth, mature asset.

In 2012, revenue at Time Inc, which has more than 100 magazine titles worldwide including its British magazine group IPC, dropped 7 percent to $3.4 billion (2.2 billion pounds) on declines in advertising and subscription sales. Operating income fell 25 percent in the same period to $420 million.

By contrast, a decade ago Time Inc's revenue was $5.4 billion while operating income was $881 million.

As the head of Time Warner Bewkes has been actively slimming down the company to just cable networks and its movie studio. He spun off AOL and Time Warner Cable, both of which now trade as independent, stand-alone companies.

"A complete spin-off of Time Inc provides strategic clarity for Time Warner Inc enabling us to focus entirely on our television networks and film and TV production businesses, and improves our growth profile," Bewkes said in a statement.

When Time Warner spun out AOL it dropped the Internet company from its nameplate. Conversely, the cable division kept the Time Warner name after its separation, Time Warner Cable.

According to a company representative, there are no plans to change Time Warner's name after Time Inc is spun out.

LANG PLANS TO DEPART AFTER SPIN

Laura Lang, the former head of digital ad agency Digitas brought in as CEO of Time Inc in 2011, will leave the company after the separation.

"After considerable thought, I have decided that taking the company through a transition to the public markets is not where my passion lies," Lang said in a memo to staff.

"Jeff has been extremely supportive and I am committed to working together with him on recruiting the right person to lead Time Inc at the spin."

Lang succeeded Jack Griffin, the former CEO of Meredith Corp who was ousted as Time Inc CEO six months into the job.

Spinning out publishing assets has been a popular choice among media conglomerates. News Corp plans to separate its newspaper and book publishing assets that include The Wall Street Journal and HarperCollins from its entertainment divisions like 20th Century Fox and the Fox News Cable network.

The rationale underlying these separations is to divide high-growth assets such as cable networks from slow-growth or in some cases declining assets like newspapers and magazines.

Analysts said these moves create two companies each attractive to different types of investors. Growth investors are attracted, naturally, to the high-growth businesses, while value investors are attracted to the cash flow generation of the slower growth assets.

As word spread of a possible deal between Meredith and Time Warner in February, a spate of media reports followed highlighting the potential culture clash if the companies were to combine titles.

Located in midtown Manhattan, Time Inc is known for its big offices, lavish expense accounts and glamorous magazines. At its heyday people working at Time Inc called it "paradise publishing." For its part, Meredith based in Des Moines, Iowa turns out steady and earnest titles pitched to women.

Still, Meredith is also known for its discipline and for successfully branching out beyond print into other areas like marketing services. It also owns broadcast TV stations.

Benchmark Co analyst Edward Atorino described Meredith in a recent investor note as "one of the better-run companies in the media sector."

Indeed, one of Meredith's hallmarks is the return it provides to investors with a $100 million share repurchase program and 60 percent dividend increase since October 2011.